Cash Flows from Operating Activities—Indirect Method The net income reported on

Question

Cash Flows from Operating Activities—Indirect Method The net income reported on the income statement for the current year was $135,500. Depreciation recorded on store equipment for the year amounted to $22,400. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $54,060 $49,190 Accounts receivable (net) 38,760 36,350 Merchandise inventory 52,920 55,340 Prepaid expenses 5,950 4,670 Accounts payable (merchandise creditors) 50,650 46,530 Wages payable 27,680 30,400 a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments. Statement of Cash Flows (partial) Cash flows from operating activities: Net income $ Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Changes in current operating assets and liabilities: Increase in accounts receivable Decrease in merchandise inventory Increase in prepaid expenses Increase in wages payable Increase in wages payable Net cash flow from operating activities $ Feedback a. Calculate the increases and decreases in the current asset/liability accounts over the period. Determine what affect these changes would have on cash. b. Cash flows from operating activities differs from net income because it does not use the accrual basis of accounting. For example revenues are recorded on the income statement when they are earned . Feedback

Explanation / Answer

Answer:

Cash flow statement (partial)

Indirect method

Cash flow from operating activity

Amount $

Amount $

Net income

135,500

Adjustments to reconcile net income to net cash flow
from operating activities

Depreciation

22400

Changes in current operating assets and liabilities

Increase in accounts receivable(38760-36350)

-2410

Decrease in merchandise inventory (55340-52920)

2420

Increase in prepaid expenses (4670-5950)

-1280

Increase in wages payable (27680-30400)

-2720

Increases and decreases in the current asset/liability accounts over the period.

18410

Cash flow from operating activity

153,910

Cash flow from operating activity =$153,910

Cash flow statement (partial)

Indirect method

Cash flow from operating activity

Amount $

Amount $

Net income

135,500

Adjustments to reconcile net income to net cash flow
from operating activities

Depreciation

22400

Changes in current operating assets and liabilities

Increase in accounts receivable(38760-36350)

-2410

Decrease in merchandise inventory (55340-52920)

2420

Increase in prepaid expenses (4670-5950)

-1280

Increase in wages payable (27680-30400)

-2720

Increases and decreases in the current asset/liability accounts over the period.

18410

Cash flow from operating activity

153,910

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